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Property: don't let lenders put you off downsizing

Downsizing your property to release cash for retirement is not always possible, but it often has fewer pitfalls than equity release schemes.  

Property: don't let lenders put you off downsizing

Managing your finances in retirement is not easy but it is made much more difficult by the vested interests of financial institutions and advisers. Latest research from Safe Home Income Plans – Ship, the trade body for equity release – maintains that downsizing is not always a viable option – which is true. But then goes on to suggest that equity withdrawal could be a better answer. Well, it would, wouldn’t it?

Equity withdrawal may be the best solution to releasing cash to subsidise retirement if you want to stay in your existing home. But the constraints on downsizing are more to do with the current value of your property and the amount of cash you can release by downsizing than anything else. Bear in mind too that many people coming up to retirement want to downsize because the house is too large for them, they no longer need the space and the cost of upkeep is relatively more expensive. Others simply want to leave the city for the country.

Equity release allows elderly homeowners to borrow cash against the security of their home at a fixed rate, currently 7% to 8%, to subsidise income or use for other purposes such as repairs and maintenance or buying a new car. The interest charge is rolled up and the total debt repaid when the property is sold. You can borrow either a lump sum, or arrange a borrowing facility and draw down cash when you need it. The drawdown scheme is cheaper and more popular because the interest doesn’t roll up so fast.

Ship points out that over 55s generally own properties which are worth more than other age groups so downsizing to release equity – while remaining in the same area – may be an option. Ship then claims that a review of 25 UK local authorities with a high density of over 55s shows that in almost a third (32%) of cases, ‘people looking at this option would either be worse off or not release sufficient money to make it worth while  when all costs were taken into account.’

Your property’s value deciding factor

This is nonsense – using averages is misleading. In all local authorities there is a wide range of properties and the factor which makes downsizing viable is what your property is worth today. If it is only worth, say, £250,000 you will have difficulty finding something smaller which will release enough capital to make downsizing worthwhile. Depending on where you live and whether you are prepared to accept a less attractive or smaller property, or move to another area, it is not impossible. However, if your home is worth £500,000 or more, there is plenty of choice of properties in the £250,000 bracket in almost all areas which would make downsizing a realistic option.

Ship quotes average house prices for over 55s and compares them with average house prices in the area. In Dorset, for example, it quotes the average value of over-55s homes as £177,009 while the average property value in the county is £252,960.  

Clearly in this situation it would be difficult to downsize unless you are prepared to move to an area where property prices are cheaper – not something people usually want to do unless they are moving from a city to retire to the country. Other areas where the average value of over 55s property is lower than the average for the county include Herefordshire, Worcestershire, Cheshire East, North Yorkshire and Shropshire. 

But that doesn’t mean to say that owners of more valuable homes cannot downsize. 

In Dorset, for example, a relatively wealthy area, there are no doubt hundreds of thousands of older homeowners with properties worth £500,000 or more who could easily find something suitable at £250,000 to £300,000 thereby releasing at least £200,000 to subsidise income in retirement.  Very often a small cottage in a town which is nearer shops and transport is less than half the price of a detached cottage in a rural area only a few miles away. And it’s more convenient for an older person.

Areas where the average value of over 55s homes is substantially higher than the county average include Lincolnshire, Cleveland, Northumberland, Norfolk, parts of Sussex, Yorkshire and Somerset so homeowners in these areas have plenty of choice when downsizing.

Everyone’s circumstances are different

Andrea Rozario, director general of Ship, admits that, ‘for many people, the home is their largest asset and releasing some of the equity will help them finance their retirement. The best way in which to do this depends on each individual’s financial situation and preferences. However, equity release and downsizing should both be considered – they are not mutually exclusive and can work very well in conjunction.’ She is right. 

But bear in mind that those who opt for equity release instead of downsizing will be paying at least 7% fixed, possibly more near 8%, for their borrowing, which means their debt doubles every 10 years. A person with a home worth £500,000 who borrows £50,000 at 7% and lives for 20 years will end up owing £200,000. 

A person who downsizes from a £500,000 home to a £250,000 home has £250,000 to subsidise income instead of just £50,000 – and no mortgage debt. While both will undoubtedly see an increase in the value of their property, the person who downsizes has greater freedom and flexibility and will enjoy a better standard of living in retirement. Remember, however much you love your current home, you can't take it with you –and your children will probably sell it anyway!

19 comments so far. Why not have your say?

Alan Cork

Sep 07, 2011 at 12:54

This is something I am looking at. I want to keep having a mortgage free property that I own outright till the day I die but now I am retired and living alone I can sell my three bedroom terraced house in unfashionable South London for about £300,000 and buy a smaller two bedromed house for £230,000 roughly and after moving and legal costs leave myself with about a £50,000 nest egg/financial buffer for a rainy day. This is a far better options than losing ownership of your property with equity realease.

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Nigel Bradley

Sep 07, 2011 at 13:42

When I advise on these deals I try my utmost to find an alternative - almost anything else will be cheaper and more flexible. There are only very rare cases where they suit.

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Sep 07, 2011 at 14:21

Equity release can be a useful tool. I am considering a move away from London but do not wish to move to far away. Trouble is; commuter belt area's remain expensive, therefore, I would need to purchase something small to make the move worthwhile. My thinking is; if I used ER I could expand the accomodation and in doing so It would lncrease the property value and go someway to combat the effects of rolled-up interest. As I no longer qualify for a mortgage this option might be a sensible way to go.

I am not in favour of "retirement homes, they can drop in value by as much as 50% when sold second hand as they are slow sellers in the private market.

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Mrs D

Sep 07, 2011 at 14:31

My in laws went for equity release 9 years ago in their mid seventies. The sting in the tail is that now the debt is £300,000 + change Vs the value of the house at £435,000 so that, in their mid eighties, now they WANT to move closer to us so support and company (they have outlived all their local friends) is at hand, they cannot afford to because there is not enough equity LEFT in the house to afford a smaller home near us or their other son. Most of these deals are COMPUND interest which, I think Einstein said, is the most powerful force in the Universe. Retirement is one thing BUT THINK AHEAD to what you might want to do when you are VERY old and perhaps can no longer drive. You don't want to end up marooned in a large house miles from family.

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Sep 07, 2011 at 14:49

Throughout her article Lorna Burke seems fixated with the idea that people own houses worth £500,000 and should downsize to houses priced at £250,000. I know of no-one in my circle of around 50 friends that owns a house worth £500,000 - and that's in Lincolnshire where Lorna claims the average to be higher. She also disparages a house valuation of £250,000, saying that those whose houses are only worth £250,000! I really do despair of the countless journalists who seem oblivious to the fact that the overwhelming majority of homeowners in the UK do not own £500,000 houses - get real Lorna! and that goes for all the other well to do media type luvvies who believe England stops at Watford.

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kevin clayton

Sep 07, 2011 at 15:48

Five years ago on retirement we sold up in London (Ealing) £463,000 and bought a three bed, three bathroom near Dundee for£175,000. The place is new and about one third larger than London and we love it. It leaves us open to sell and move when we are very old.


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Sep 07, 2011 at 18:21

we have been trying to downsize for 2 years despite a huge reduction in the price we have been unable to sell,the lower we go what will be able to buy and release some money a hovel,i think not ! as i have said before do not knock equity realise until you are old enough!

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David Logan

Sep 07, 2011 at 19:31

I tend to agree with Rustie. Most Equity Release enquiries are from people with homes worth much less that £500K. In the West Midlandsthe typical value is between £100K & £200K. Downsizing after expenses and get you in costs would mean moving into something that most people would not find acceptable.

I agree that Equity Release is probably a last resort for anyone with ambitions to leave money to family but there are many folks out there with no children for whom it is free money.


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Anonymous 1 needed this 'off the record'

Sep 07, 2011 at 20:26

Surely one must prepare retirement, I bought my downsized seaside home 10 years before retiring so I could use the capital from my family home to create a pleasant income while retired. A good portfolio of high quality shares producing 4 or 5 % with growth is the answer.

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Anonymous 1 needed this 'off the record'

Sep 07, 2011 at 20:30

investing on the stock market is a long term learning cure, GOLDEN RULE,


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Sep 07, 2011 at 20:50

Anonymous 1 - "A good portfolio of high quality shares producing 4 or 5%"....what planet are you on? What the hell is a "good" prtfolio? ditto "high quality shares" Premier Foods, Lloyds, Barclays, BP Oil, BT....that kind of thing do you mean?......get real!

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Anonymous 1 needed this 'off the record'

Sep 08, 2011 at 07:41

rustie, Shell %.5% Tesco close to 4% Suez 5% Pennon 4% air Liquide 3%

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Sep 08, 2011 at 09:30

Anonymous 1 - Suez, Pennon, Air Liquide....household names that roll of the tongue!!!!!!!!!!!!!! What are you, a city insider?

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Anonymous 1 needed this 'off the record'

Sep 08, 2011 at 17:13

Rustie ,Just an international investor, by thne way I forgot National Grid more than 5%

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Sep 08, 2011 at 17:34

Anonymous 1: Ah yes, National Grid - of course - yes, they're the shares I bought in January 2008 at 830p....what did they close at today I hear you ask? about 632p! That's just a drop of 31.3% so that's all right then. You're like all the rest Anonymous 1 - you're in denial and always winning .

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Anonymous 1 needed this 'off the record'

Sep 08, 2011 at 19:43

Why did n't you top up at 530 which would have slashed your cost price, as for always winning,if one is in for the long haul things are n't too bad.

Morrisons had a good day,I'm a great believer in this group,with an on line service they will go places.

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Sep 08, 2011 at 21:20

Anonymous 1: Your last response has confirmed my suspicions - you haven't got a bloody clue.

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Anonymous 2 needed this 'off the record'

Sep 17, 2011 at 14:29

Stock Market is great for investments, but on the long term..... minimum 5-10years..... yes you have to start somewhere....... and if you start when the market is on a high ..... start very carefully and build your knowledge slowly.... knowing that you will add to your holdings when the market is down and trim them when the market is High........ also diversity and good Funds are also a part of it.......... nothing wrong with National Grid..... since your investment in 2008 you would have been able to add to your holding on lows & trim on highs at least 5 to 10 times....... you should in fact be in an excellent postion now with your National Grid holding........ and also been collecting good dividends.

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Feb 24, 2012 at 12:53

We're building a portfolio of strong global companies with well covered dividends as part of our retirement plans. No more than 5% per company, no more than 10% per sector, and buy on the opportunity when everything about the company looks good but the market is down because of wider concerns.

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